Embrace the future
The key to sustained excellence in the oil and gas industry. By Mark Routt
Changes to the global bunker fuel specification in 2020 as part of the International Maritime Organization’s (IMO) new regulations, paired with US tax reforms, are set to transform the US oil and gas downstream industry into a cash cow. Modifications to global bunker fuel specifications will change refined product markets, influencing a pronounced shift from high sulphur residues to lighter, cleaner bunker fuels. Refiners who are able to create clean products and destroy residue are set for unexpected levels of profit. It is predicted that this upgrading spread will translate to a $5-10 per barrel boost to full conversion refining margins on the US Gulf Coast.
The reduction of the federal corporate tax rate from 35 per cent to 21 per cent brings US total corporate taxation more in line with larger economies and addresses a key concern about American competitiveness in the global economy. Coupled with generous allowances and accelerated depreciation, the lower rate of tax will boost investment returns on capital projects. This provides companies with the cash needed to fund their projects and to deliver a quick payback. Tax reforms will act as a springboard to launch Industrial Internet of Things (IIoT) and Industry 4.0 technology investments that will position US hydrocarbon companies at the forefront of the next industrial revolution. In the near term, generous capital allowances create an opportunity for US companies to plough their profits back into their assets. Smart money will be spent on getting better, not bigger.
With these two key areas for profitability on the horizon, refiners shouldn’t rest on their laurels and should look to improve their bottom line to stay profitable in a highly competitive landscape. But how do they go about making the most of this opportunity?
<strong>Choose profitability, choose technology</strong>
Over the past few years, digitalisation has become a major trend in global heavy industry, with IIoT and Industry 4.0 initiatives driving innovative new technologies like intelligent, outcome-oriented, remote unit monitoring and digital twin modelling. The business case for investing in new technology is becoming more apparent, with bottom line improvements in yield and asset availability able to justify the cost of technology investments.
Many oil companies have already nominated C-level executives to lead their digitalisation efforts. For US refiners, the new lower rate of taxation can bolster digitalisation project economics by effectively lifting optimisation investments over corporate hurdle rates that have been hard to leap in the past.
Operationally, yield and energy optimisation projects can help refiners to maximise the exploitation of their assets; filling hydraulic spaces and improving the yields of the highest value products while economically optimising energy consumption. Projects of this type can offer up to ten-fold returns on typical seven to eight figure investments. Investment in intelligent unit monitoring and preventative maintenance help keep assets safe, and drive value from increased uptime and less frequent, shorter maintenance cycles.
Refiners may also choose to look at portfolio optimisation strategies to ensure they have the right assets on the ground in the right locations. This includes enhancing storage and logistics assets for operational flexibility, smaller-scale petrochemicals investments to boost plant margins, and technology investments to optimise refinery scheduling to better manage working capital requirements.
This is also an excellent opportunity to invest in people. With staffing levels at all-time lows, companies can invest in training programs to ensure their refinery personnel have the right skills in place to both operate their plants and take advantage of these new digital solutions. Developing staff for tomorrow’s capabilities will see companies ensure they are fit for a higher technology future. And companies that are at the forefront of the digitalisation revolution will attract the best talent ahead of competitors.
<strong>Technology supports a transformative effect on organisational culture</strong>
Research conducted by KBC shows that leading refiners have cultures that use technology to transform themselves into knowledge-based organisations. These are organisations that have forgone the traditional bluecollar/ white-collar view of the world and are focused on leveraging knowledge to drive business improvement via innovative business management practices. By aligning operations capabilities with higher level business goals, the entire organisation learns and evolves toward a higher technological maturity.
Conventional wisdom might suggest that when the operator’s span of control increases, so too would operator loading. However, our own data shows that where staff typically have significant oversight of their respective facility, operator loading levels drop significantly. In some cases, operator loading is lower than those with a far smaller span of control. Counterintuitively, the operators with a broader span of control are more efficient and effective than those trapped by a narrower remit.
From our broad data set, we see operations staff required to manually and repetitively conduct tasks, either due to poor technology implementation or the lack of technology itself. On a deeper level, KBC has identified that more ‘disciplined’ operators need to intervene less into the system’s normal operation. Better information handling and less repetitive workload mean that the operators have a more intuitive knowledgebased understanding of the drivers behind optimised performance.
At a macro level, leading companies are establishing cultures of continuous improvement in which knowledge is king. These organisations are continuously looking for opportunities where knowledge can be built into their systems and result in better decision making. This is exactly where the application of digitalisation excels.
Organisations that have a combination of strong technical leadership, a willing team, and a commitment to drive to the top will be best positioned to exploit opportunities like the tax reform / IMO nexus. By implementing digitalisation throughout their business strategies, these companies will be able to attract the best talent, increase performance and hold on to a competitive advantage whilst maximising revenue and reducing costs. Organisations at all stages of the maturity curve can benefit from embracing digitalisation. By doing so, companies can become ‘digital ready’ and truly take advantage of the operational improvements these new technologies present.
Mark Routt is chief economist at KBC. KBC, a wholly-owned subsidiary of Yokogawa Electric Corporation, is all about excellence in the Energy and Chemical industry. Living excellence in all it creates and in all the services it delivers and leaving a sustainable legacy of operational excellence among its customers.
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